the Historical Development of the Minimum Wage in the United States and Indonesia

Minimum wage is not an invention of the United States. The system began in New Zealand and Australia as a response to inhumane working conditions. The idea for a minimum wage spread as a need for a "living wage" became apparent in other countries. The minimum wage was designed to address the problem of inhumane working conditions and "sweating". Sweating was a term used to describe wage conditions that were too low to support a socially acceptable level of family life. The point of the minimum wage was to allow an individual to work an average amount of hours and make enough money to sustain a family at a healthy level. While politicians, economists, and social reformers debated over the proper amount of wage necessary, the majority were concerned that the individuals receive an adequate income.

In the recent discussion of the use of sweatshops in Indonesia, the topic has naturally led to a comparison of the industrial development in the United States and developing nations. In a capitalist market, should it be expected that all nations with industry will begin with horrible working conditions and eventually progress to the state that the United States is currently in? Is the pattern that the United States developed the best method for all capitalist nations? Is it the role of the developed nations to help developing nations to progress to more humane conditions? In the United States, the establishment of the minimum wage was one of the main ways that the status of workers was improved.

When the minimum wage debates began in the US, a large number of workers were living in poverty. In a study done by the Immigration Commission in 1909 of workers in the basic manufacturing industries and in coal mining, researchers found that many of the families surveyed were living in destitute conditions. Of the families surveyed, 64 percent had annual incomes less than $750 and 31 percent of those were under $500 per year. The average family size was 5.6. In the cost of living index, $700 was listed as the minimum amount that a family of five could live on. These calculations left many of these young families to be categorized as in poverty or near poverty conditions.

Studies done by the Federal Children's Bureau in the 1910's show that many children of the working poor had a high percentage of malnutrition and infant mortality. Many children were forced to leave the public schools in order to work in factories to supplement the family income. There were fewer women in the homes because it was necessary for them to earn a wage as well. The result of these changes was alledgedly a breakdown of the traditional family structure, creating a situation in which the children suffered the most by no longer having caregivers in the home.

In the manufacturing industries located in the large urban areas, studies estimate that two-thirds to three-fourths of the women employed were unmarried. In a survey of 1,300 individual women, it was found that 65 percent lived with their families, 75 percent of whom gave all of their wages to the family. Estimated cost of living for these women was, $5.90 per week, leaving each a balance of 10 cents. At these rate, $5.20 could be saved in a year, if there are no extra expenditures such as doctor visits.

When the debates about a minimum wage began in the 1910's, there was argument that the wage should be set for men only, as the breadwinners of the family. But the other side was that women and minors were the groups that were most discriminated against in the workplace. Consensus was not developed on this issue, and as individual states made decisions of whether to pass minimum wage legislation, each had to decide who the beneficiaries would be.

The United States did not have a minimum wage until the New Deal, but individual states had passed minimum wage legislation early. In 1912, less than two decades after the first minimum wage laws were passed abroad, Massachusetts passed the first wage legislation in America. The lag between American involvement and that of other nations was not for lack of concern for workers, but for fear that the American constitution would not allow such legislation that would interfere with the "freedom of contract" requirements of the Fourteenth Amendment. But, states felt they had more freedom to pass minimum wage legislation. The main argument for the movement in Massachusetts was due to the great number of workers, particularly women that were employed or looking for work in the state. High levels of immigration and great demand for jobs were pressing the wages down so far that they were often below the standard cost of living. The Massachusetts Commission on Minimum Wage Boards (January 1912) issued the following points for why the legislation should be passed:

1. It would promote the general welfare of the State because it would tend to protect women workers, and particularly the younger women workers, from the economic distress that leads to impaired health and inefficiency.

2. It would bring employers to a realization of their public responsibilities, and would result in the best adjustment of the interests of the employment of the women employees...

...4. It would tend to prevent exploitation of helpless women and, so far as they are concerned, to do away with sweating in our industries...

...10. It would give the public insurance that these industrial abuses have an effective and available remedy.

As the first state to attempt minimum wage legislation, Massachusetts swam in uncertain waters, and feared a constitutional challenge. The state decided to confront the issue as their duty to protect the rights and well being of women and children. It was understood that the state could intervene to protect the rights of vulnerable groups. The law that was passed was not well understood by workers or employers, and was not mandatory. Employers were viewed by the public as an untouchable group, and they were not forced to comply with the new law. Since the legislation was fairly weak, it still did not address the fundamental problem of sweating. The main attributes of the legislation were voluntary compliance, dual wage setting criteria (the living wage and the financial condition of the employer) and the use of boards and commissions for rate determination. These basic precepts were used to create and determine the effectiveness of the legislation that was later derived in other states.

Regardless of its inability to force change, the Massachusetts law did establish the ground work that other states used to write minimum wage legislation. In 1913 Utah, Oregon, Washington, Minnesota, Nebraska, Wisconsin, California and Colorado enacted minimum wage laws. Arkansas and Kansas followed in 1915, Arizona in 1917, the District of Columbia in 1918, and Texas, North Dakota, and Puerto Rico in 1919. Even among the states that were able to enact legislation, it was not done without a battle in the judicial system. At both lower and federal courts, rulings were often changed and were unpredictable. In some instances, courts ruled that the legislation was a violation of the Fourteenth Amendment, while others decided that it was in line with laws that set maximum hours, laws that were believed to be constitutional. In 1923 the issue of minimum wage came before the Supreme Court in the case of Children's Hospital v. Adkins. The matter before the court was freedom of contract and the due process clause as it related to the minimum wage legislation in the District of Columbia. The court upheld the decision of the court of appeals that the legislation was indeed unconstitutional. The opinion of the court stated:

A statute requiring an employer to pay in money, to pay at prescribed and regular intervals, to pay the value of the services rendered, even to pay with fair relation to the extent of the benefit obtained from the service, would be understandable. But a statute which prescribes payment without regard to any of these things and solely with relation to circumstances apart from the contract of employment, the business affected by it and the work done under it, is so clearly the product of a naked, arbitrary exercise of power that it cannot be allowed to stand under the Constitution of the United States.

Many argued that the opinion of the court reflected personal belief about the rights of the employer rather than issues of actual law and policy. But, in light of the decision by the court, all of the states feared that their minimum wage legislation would be challenged. States began to change the language of their legislation to be a "fair wage" rather than a "living wage" and prohibit an oppressive wage rather than establishing a minimum wage. New states continued to enact legislation, and in 1937, the Supreme Court reversed its decision on the constitutionality of the minimum wage, arguing that the economic conditions of the nation had changed. The case was from the state of Washington and dealt with the issue of the minimum wage and the earnings of women. In the opinion, the Court stated:

What can be closer to the public interest than the health of women and their protection from unscrupulous and overreaching employers? And if the protection of women is a legitimate end of the exercise of state power, how can it be said that the requirement of the payment of a minimum wage fairly fixed an admissible means to that end?

As the Court had stated in the reversal of their opinion, the economic climate of the country had changed dramatically. The nation faced the Great Depression and Franklin D. Roosevelt stepped forward with a wealth of New Deal legislation with the intention that the new policies would help to employ workers, and would restore Americans' faith in the economy. In 1933, the Roosevelt administration developed a National Industrial Recovery Act (NRA). The purpose of the act was to suspend antitrust laws so industries could enjoy less competition and higher wages due to fair-trade codes. In connection to the NRA, various industries adopted more complete codes of their own which established the amount of hours that could be worked and a minimum wage, and abolished child labor. Just when it appeared as though the conditions for workers was improving, a case came before the Supreme Court testing the constitutionality of the NRA. On Black Monday, May 27, 1935, the Supreme Court disarmed the NRA due to the case of Schechter Corp v. United States. The case questioned the code to improve the conditions under which chickens were slaughtered and sold to retail kosher butchers. The case invalidated the restrictive trade policies set be the NRA codes and the progressive labor provisions of the codes. The Supreme Court went on to invalidate both the State and Federal labor laws. Some of these decisions were very controversial and unpopular with the public, one to such an extent that it was considered a "new Dred Scott decision."

Wage and hour legislation was a major issue in the presidential race of 1936. While campaigning for reelection in Massachusetts, FDR was in a crowd in which a young girl tried to pass him an envelope. When a policeman pushed the girl back, FDR told an aide to retrieve the envelope. The girl's note read, "I wish you could do something to help us girls...We have been working in a sewing factory...and up to a few months ago we were getting our minimum pay of $11 a week...Today the 200 of us girls have been cut down to $4 and $5 and $6 a week." Roosevelt held tight to a platform for the rights of workers, and believed that his land slide victory was a sign that the people supported the New Deal policies that he had proposed in his campaign.

As FDR and his Secretary of Labor, Francis Perkins, examined ways to write legislation to improve labor practices that would be constitutional, they tried to make model employers of government contractors. They found that the Federal Government actually encouraged employers to exploit labor because the job always went to the lowest bidder. In 1935, approximately 40 percent of contractors employed by the government cut wages below and stretched hours above the standards that were developed under the NRA. Since the court had reversed its decision in 1937 in the West Coast Hotel Company v. Parrish case, it appeared that it would be easier to get legislation through that some may deem unconstitutional. FDR asked Perkins to pull out the "nice unconstitutional bill [that had been] tucked away." FDR sent the bill to Congress on May 24, 1937 stating that America should be able to give "all our able-bodied working men and women a fair day's pay for a fair day's work." He also stated that "a self supporting and self-respecting democracy can plead no justification for the existence of child labor, no economic reason for chiseling workers' wages or stretching workers' hours. He said that the conditions set in the states "do not meet rudimentary standards of decency [and] should be regarded as contraband and ought not to be allowed to pollute the chanels of interstate trade." As the debate on the legislation ensued, the labor unions were divided on the issue of how strong the legislation should be. Union leaders feared that a minimum wage would translate as a maximum wage and that wage boards would intervene in areas previously reserved for labor-management negotiations. Debate was heavy in Congress and across the country concerning the minimum wage law. The legislation was first introduced in 1937, proposing a 40 cent minimum wage and 40 hours per week. The bill was repeatedly sent back to committee to be revised, and was changed to a minimum wage of 25 cents before the legislation passed both House and Senate by June 13, 1938. On June 25, 1938, FDR signed the Fair Labor Standards Act (FLSA) into law. The law had been revised so thoroughly in the Congressional process that it proved to be a very weak bill.

The 1938 Act was applicable to employees in interstate commerce or in the production of goods for interstate commerce. Between 1938 and 1961, the minimum wage was raised from $0.25 to $1.15. In 1961, an amendment was added to the FLSA which extended coverage to employees in large retail and service enterprises, local transit, construction, and gasoline service station employees. The minimum wage for the newly covered individuals was set at $1.00. The Act was expanded again in 1966 to cover state and federal employees and to other retail workers that were not previously covered. The amount for the minimum wage has steadily, but slowly increased. As of September 1, 1997, the minimum wage was increased from $4.75 to $5.15. It is still argued that the amount of the minimum wage is not a "living wage" and is certainly not an amount that a family can live on at a socially acceptable level. The protection of workers leaves much to be desired in the United States.

How does this correspond with the situation of workers in Indonesia? How did the country decide on a minimum wage? Does the level of the minimum wage provide a "living wage"? Most would argue that the minimum wage in Indonesia is not sufficient to meet the needs of the workers and that the wage situation is very poor. Similar to the US prior to 1938, Indonesia does not have a national minimum wage. The minimum wage is set by region, and thus differs from one area of the country to another. The minimum monthly wage in Greater Jakarta is currently set as Rp 172,000 (US$ 17.20). The highest minimum wage is for those that are working in the industrial zone of Batam, Riau and is set at Rp 220,500. The lowest minimum wage is in Yogyakarta with an amount of Rp 106,500.

Director General of Labor Supervision Syaufi'i Syamsuddin responds to questions of why a national minimum wage has not been set by stating that the government has always encouraged companies and all workers' unions to make their own agreement over wages so that they would not depend on the government to set wages. Yet the government does not hold a 'hands off' policy in regard to minimum wage. In April of 1996, the government mandated a minimum wage increase of 10.63 percent. The wage rate was raised another 10.07 percent effective April 1, 1997. With these increases, Indonesia made itself the only country to raise its regional minimum wage by 126 per cent within three years.

The Centre for Strategic and International Studies (CSIS) in Indonesia stated that the government should focus on setting minimum wages by sectors of employment rather than regionally, as they are currently doing. If wages were set by sector, the amount would be dependent on the worker's skills and the level of technology necessary to complete the job. As it is now operating, the minimum wage applies only to the formal sector. When the wages were first established in 1992, the average daily wage was Rp 2,000. After the increase in April 1997, the minimum wage increased to Rp 5,176 (US$ 2.1). CSIS continue their argument by stating that the government has little to no enforcement of the minimum wage. An estimated 25 percent of workers in the formal sector were earning less than minimum wage in 1995, and only 37 percent of the workforce is included in the formal sector.

With the rise in the minimum wage in 1997, Manpower Minister Abdul Latief issued a statement that the government raised the wage because they were committed to the prosperity of the workers. This was an effort to thwart the unrest of workers concerning their wages. But the government did not wish to turn their backs on business either. They issued a clause allowing companies that could not afford to pay the wage increase to submit appeals to the government to postpone the increase for up to 12 months. The same policy was used in 1996, and of the 365 companies that claimed difficulties, 269 were granted waivers. In 1997, 464 companies submitted applications for postponement of the minimum wage and 276 were given approval.Minister of Industry and Trade Tunky Ariwibowo supported the companies as they claimed problems, stating that the wages had increased at a much faster rate than labor productivity. He argued that the wages had increased by 170 percent between 1985 and 1995, but that productivity had increased only 75 percent. The chairman of Federation of the All Indonesia Workers Union disagreed, stating that productivity had increased 400 percent while the minimum wage had risen by only US$ 2. No research was given to support either of these claims.

There are fairly frequent strikes over demands for wages to reach a minimum level. In 1996, the strikes over wages increased by 26 percent, according to Ministry of Manpower figures. Within Greater Jakarta, 800 labor cases were reported in 1996, most of which were related to wage hike delays. One of the main problems that workers face is the great demand for jobs. With a labor surplus, the bargaining power of the workers is weak, and significant rises in the minimum wage are unlikely. In his book Worker Rights and Labor Standards in Asia's Four New Tigers (1997), Levine argues that poor men and women in Indonesia will often accept any job offered, even if it is less than minimum wage, which itself falls below basic needs. People need work, and are willing to take extremely low paying jobs in order to have any type of income. With this dire necessity for employment, and a surplus in labor, the bargaining rights of the workers is worsened.

What amount is considered enough to be a living wage in Indonesia? With the raise of minimum wage in 1997 by 10.7 percent, the minimum wage averages 95.32 percent of the minimum physical requirement, compared to 92.49 percent in 1996. The physical requirement is based on the calculation for the local costs for a daily nutritional intake of 3,000 calories. In January 1998, the question of raising the minimum wage was brought forward once again. Deputy Chairman of the Workers Union Federation (FSPI), Rustam Aksam, stated that the government must raise the minimum wage by at least 13 percent to allow workers to meet their basic needs. He appealed to the business people and workers by saying that "businesspeople should not see the hike as a business cost, but rather a social cost. We must think about the possible social upheavals that could break out [should workers not get a wage raise]. A bigger cost will have to be paid."

Whether workers in Indonesia will see increases in the minimum wage this year is yet to be determined. The minimum wage to usually determined annually after consulting with representatives from the government, businesses, and workers. Due to the harsh economic conditions that Indonesia has faced recently, four industry associations, Aprisindo (Association of All Indonesian Shoe Industries), API (Indonesian Textile Association), AMI (Association of Indonesian Manufacturing Companies) and APMI (Association of Indonesian Toy Industries) have stated that it would be difficult for their companies to sustain an increase in the rate of minimum wage this fiscal year. Currently there is discussion that a compromise will be reached so that minimum wage will be increased, but that the amount that companies must pay for state workers insurance will be decreased. In light of the recent crisis, Manpower Ministry has issued statements relating that 65,442 workers from 278 companies have been laid off since last July. 6,000 more workers are expected to be laid off, and other factories have been forced to work in shifts. Estimates of the number of people that have been laid off vary from 3.9 million workers to 13 million. Most of these workers are from the construction sector. The country is painting a grim economic picture for the next year in terms of both jobs and general growth.

The process for calculating wages was made slightly more confusing for many workers in 1996. In that year, the government required that all private companies calculate wages on the basis of a 30 working day month rather than using the traditional practice of setting a basic daily wage. With reports from some critics of Indonesian labor practices, this policy makes it easier for employees to tamper with pay stubs and potentially require or allow workers to worker more than they are allowed to work each week as established by national law. Indonesia is explicit it mandating a 7 hour workdays and 40 hour workweeks with one 30 minute rest period for each 4 hours of work.

While the government sets these policies, and issues a minimum wage, there is limited enforcement of the labor regulations. A number of employers do not pay the required minimum wage, nor do they provide the other required benefits (social security, health benefits). The lack of government enforcement has been a main reason for the strikes that have taken place throughout Indonesia.

Facing a government that does not enforce the laws that it makes, as well as a minimum wage that is set too low for an individual to achieve a living wage, the situation in Indonesia does indeed appear dire. With the current economic situation, if Indonesia raises their minimum wage, they may lose the jobs that they need so desperately to keep their people employed. There will be an excepted 2.7 million people entering the job market next year, but if the economy grows 1.3 percent as hoped, only 1.3 million jobs will be created. The nation needs global industries to remain in Indonesia and provide jobs. With limited bargaining power and labor surpluses working against them, it is unlikely that the situation of the workers will substantially improve. The so called invisible and inevitable costs that appear as an excuse for low wages will hinder the improvement of wages. Todung Mulya Lubis, a corporate lawyer and human rights advocate states that workers will not receive better wages until the country has a clean government and does away with invisible and inevitable costs.

Having instituted a minimum wage only in 1992, Indonesia has a lot of growing to do. The minimum wage is still not national, but varies by region, making it even more difficult for the government to adequately enforce. The country is very focused on business and economic growth, which overshadows the underlying problems of workers rights and adequate working conditions. Until there is a shift from thinking about the economy to thinking about human rights, it is unlikely that positive change for workers will occur. In the case of multinational corporations that operate in Indonesia, one can easily argue that they should serve as an example to the rest of the nation by providing outstanding working conditions and better-than-decent wages. When the Indonesian government raised the minimum wage in 1997, to an amount equivalent to US$ 2.26 a day, a Nike spokesman said that Indonesia "may be pricing itself out of the market." This remark is made even more astonishing when one considers that Nike will pay an Indonesian woman $738 for a full year of work, and pays Michael Jordan $20 million a year (1997 figures) to advertise its products. The amount that is being paid to Jordan is the same amount that Nike pays to 27,100 Indonesian workers.

The Dartmouth Report found that Nike is paying all of its employees at or above the minimum standards set by the Indonesian government. While it is positive that Nike subcontractors meet the basic requirements when so many companies do not, it is distressing that Nike is not willing to step up and serve as an example of a leader in workers' rights. It is true that it is not their duty to serve as an example, but they are a company with great influence and their move in a step toward human rights could make a big difference for all Indonesian workers.

With the more recent development of a minimum wage in Indonesia, it seems like a much hotter issue than in the US. While the US is still determining how much the rate should be increased each year due to inflation and the cost of living increases, the idea that a minimum wage is necessary is a fairly solid concept. As a developed nation, human rights are a huge issue in the US. As Indonesia recovers from its recent crisis and makes use of the IMF dollars that are pouring into the country, we must be involved and work to ensure that human rights are a major issue as Indonesia develops as well.

Works Cited

Country Reports on Economic Policy and Trade Practices. Report submitted to the Committee on International Relations, Committee on Ways and Means of the US House of Representatives and the Committee on Foreign Relations, Committee on Finance of the US Senate by the Department of State. February 1995., Washington DC. p. 58.

"Government urged not to raise minimum wage this year," The Jakarta Post. January 7, 1998.

"Government's decision on minimum wage set for next week." The Jakarta Post. March 21, 1998.